Uber bows out of China fray with lots of fight left for dominance elsewhere

The ride-sharing app, pugnacious pioneer of the sharing economy, has given up on its attempt to get the better of Chinese domestic rival Didi Chuxing.

Uber agreed instead to hand over its branding, operations and data in exchange for a 20% holding in Didi, which is valued at $35bn. That makes Uber’s stake worth some $7bn, not a bad return on the $2bn the San Francisco tech firm has already spent trying to establish a profitable beachhead in the People’s Republic. Didi will also invest $1bn in Uber Technologies, adding to the company’s already hefty pot.

Investors and analysts alike are applauding an end to a costly and potentially unwinnable battle that saw both Uber and Didi burning through cash and racking up losses in a bid to pull in front.

However, there is no doubt that with this uncharacteristic tactical retreat, Uber had its eyes on a bigger prize: a dominant position in the world’s biggest taxi market. “They have been talking about China being their most important market, but the reality didn’t measure up with the rhetoric,” says Arun Sundararajan of New York University’s Stern School of Business and author of The Sharing Economy. “Didi has maintained its market share despite Uber really pushing over the past year. For some on Uber’s executive team this might have been a hard decision, and perhaps some egos have been bruised.”

It has been helped in its global expansion drive by a star-studded advisory board boasting royalty, White House insiders and a former prime minister. But neither its financial clout nor its friends in high places could deliver dominance in China. “I have learned that being successful is about listening to your head as well as following your heart,” founder and chief executive Travis Kalanick said on the company’s website.

Rob Kniaz, founding partner at venture capital firm Hoxton Ventures, suggests that this uncharacteristic equanimity stems from a chastening but timely recognition that if he couldn’t beat his Chinese rivals, he had to join them: “Travis is not known for his humility, but he came back, tail between his legs, and approached the Didi founders to get a deal done.”

Kniaz points out that Uber might have emerged from the fray with much less had it not enjoyed the support of domestic investors in such as Baidu, the biggest search engine in China, where Google is banned: “That was what allowed him to save face. It could have been a lot worse.”

And while Uber’s Chinese experience proved that it cannot expect complete global hegemony, admitting defeat on this occasion is being hailed as a blessing in disguise. Uber was losing a lot of money in China, money that could be spent on its planned investment in self-driving cars, on building its UberEATS food delivery service and on expansion elsewhere.

“Over the past year, the single biggest point of concern investors have had about Uber has been the China strategy,” says Sundararajan. “They feared this was a distraction and a continuing source of losses as they tried to pursue an impossible goal of being the dominant provider.”

It was also facing the threat of an alliance between Didi and a clutch of Uber rivals, including Lyft in the US, Ola from India and Grab in south-east Asia. Now that Kalanick and his Didi counterpart, Cheng Wei, will sit on each other’s boards, Didi and Lyft, Uber’s main competitor in the US, are highly unlikely to break bread together. This Sino-American entente will make it easier for Uber to pursue paths of lesser resistance than it was encountering in China.

A lengthy taxi ride across the Himalayas from China lies an almost equally gargantuan and growing market, and one that will probably erect fewer barriers to entry.

“Their growth in the next decade will come from a market like India,” says Kniaz. “India has strong local competitors [such as ride-sharing app Ola] but without the government-backed rivals that came with Chinese nationalism, Uber can win in that market. It has so much cash and has shown it is willing to spend it aggressively, so it’s dangerous in any market.”

With such tantalising growth potential in mind, the eyes of the investment community will now turn to a potential stock market float for Uber in the US. Investors would have found it much harder to put money into an initial public offering (IPO) while a question mark still hung over Uber’s Chinese fortunes.

But talk of an float could be premature. Kalanick has previously stated that he will leave an IPO “as late as humanly possible”, and that Uber has had no trouble raising funds as a private company.

The significance of the Didi deal is as much about the endurance of the sharing economy as it is about Uber itself, according to Sundararajan. “This is a moment that speaks to the immense market size of sharing-economy industries,” he says. “We should be looking at this as the next generation of transportation. Uber isn’t going after the taxi industry; it’s going after the automotive industry. It wants to divert the trillions of dollars we spend on new and used cars.”

Sundararajan believes the same potential to home in on the territory of established global industries exists for fellow sharing economy firms, from Airbnb’s seismic effect on tourism to the rapid growth of takeaway food service Deliveroo. “There is a clear signal that a big chunk of business in these massive industries is up for grabs by the people who win the digital disruption war.”

DRIVING FORCE

Uber is well used to bumps in the road, having faced fierce opposition to its efforts to conquer some of the world’s most lucrative markets. In the UK it has been the subject of bitter protests from London’s black cab drivers, who brought the capital to a standstill earlier this year.

It has also faced legal tussles over its right to operate. In France, a judge slapped Uber with a €800,000 fine for running the “illegal” UberPop service using unlicensed drivers. French courts also fined two of the company’s senior executives a combined €50,000. The UberPop app connects customers, via smartphones, with non-professional drivers using their own cars. A court in Frankfurt also upheld Germany’s ban on UberPop, rejecting an appeal by the San Francisco-based firm.

The bans were just the latest hurdles threatening to obstruct the Californian firm’s expansion. UberPop was declared illegal by courts in Italy and Spain, and appeals are pending in Belgium and the Netherlands.

While several European states have put legal obstacles in the way of Uber’s expansion - despite support from European politicians - it has also faced fierce opposition in other parts of the world. Protests by taxi drivers in Jakarta, Indonesia, erupted into violence earlier this year, while Brazil initially moved to ban Uber outright. This was overturned last year, sparking anger from taxi drivers in Rio de Janeiro.

But opposition has not dissuaded investors, who have placed major bets on its ongoing expansion. Saudi Arabia agreed to invest $3.5bn in the company earlier this month, while the world’s biggest carmaker Toyota, agreed a partnership with Uber that will offer favourable leases on cars.